Pip Murphy | 6 June 2018

Reform and Regulation - Class actions, contingency fees and legal finance

There are two significant legal reviews being undertaken in Australia, one by the Victorian Law Reform Commission (VLRC) and one by the Australian Law Reform Commission (ALRC). These reviews are looking at reform and regulation in Australia of class actions, lawyers charging contingency fees, and firms providing legal finance for disputes.

With the final reports due to be released in June and December 2018 respectively, the Australian legal fraternity, as well as legal finance professionals, are waiting for the proposed reforms with great interest. These wide-ranging reviews are expected to have a significant impact on the way disputes are run in Australia.

Turning to each of the proposed areas for reform, we provide our observations and comments below.

Class Action Reform

Most class actions in Australia are supported by legal finance professionals. Vannin Capital has, and is, involved in some of the largest class actions in Australia in recent times.

Vannin Capital has witnessed a significant increase in the incidence of competing class actions, whereby more than one case is filed in Court in relation to the same circumstances. The race to the Court has certainly been on the rise with the influx of funders into the Australian legal industry and the rise of law firms seeking to enter this market.

Courts have been attempting to deal with these competing class actions on a case by case basis. The most recent decision being the one handed down by Justice Lee in GetSwift where all but one class action was stayed. This decision has been appealed by law firm Squire Patton Boggs, and class action lawyers and funders are now waiting to see what impact this will have.

With no real certainty across courts and jurisdictions, the ALRC has foreshadowed looking at a case management protocol to standardise the management of class actions going forward. The proposed protocol would address issues such as:

  • Open vs closed class actions and the need to undertake a bookbuild and to sign up lead and group plaintiffs. The ALRC appears to be looking at ways to avoid traditional bookbuilds to avoid the associated costs which ultimately come out of the settlement sum or judgement, which then reduces the amounts returned to the class members; and
  • Early intervention and management of claims. The ALRC are proposing an early case management conference at which a timetable would be set for claims to be filed and a date set for a 'consolidation hearing' where it would be decided which of the competing actions would proceed as an open class and, which would be closed or stayed pending the outcome of the open class action. This would bring certainty to the process and ensure that the claims are filed in a timely fashion, and so that companies know when and where the claims will be brought. The multiplicity of proceedings now brings increased cost and risk to companies and great uncertainty which can result in financial instability. The ALRC appears to be looking for ways to stream line the process, and to bring greater certainty for all those stakeholders involved in bringing and defending a class action.
  • The amounts that are to be paid to legal finance professionals. The ALRC are looking at whether the court should have the ability to reject or amend the commission rate in litigation funding agreements, and otherwise control the amounts received by the class members at the conclusion of the matter.

Will it work? This is yet to be known of course but, given the inherent uncertainties that litigation brings, it will have a significant impact on how these claims are currently being resourced and run.

Contingency Fees

The introduction of contingency fees has been a longstanding debate in Australia. It is permitted in the UK and the USA to varying extents. The ALRC are proposing to allow class action plaintiff lawyers to charge contingency fees but that this be permitted in limited circumstances. These are as follows:

  • That the lawyers must obtain court approval before charging contingency fees;
  • That a legal finance professional would not be permitted to participate in a claim where a lawyer was proposing to charge contingency fees;
  • That lawyers are only entitled to charge contingency fees OR an hourly rate and not a combination of the two;
  • That where a lawyer charges contingency fees, the lawyers must advance disbursements (expert and counsel by way of example); and
  • That the lawyers must bear the adverse costs risks and not the plaintiff.

If these are the ultimate conditions that stand before a firm can charge contingency fees it is difficult to see many firms taking up the opportunity. There is significant risk attached with this type of investment with a large downside if the claim is unsuccessful. Does the potential upside offset this risk if the claim is successful? Outside of specialist class action firms, we are not convinced that many firms will have the risk appetite to take this on.

The ALRC proposal is designed to prevent a situation where a class member is required to pay a percentage of the settlement to both solicitors and funders. It does not, however, prevent a funder from sitting behind a solicitor on a portfolio basis where contingency fees are being charged.

Portfolio funding is on the rise in Australia and it can be best described as Vannin Capital providing a single facility to a law firm or corporate to support multiple claims. Vannin Capital then receives its commission from the claims in the portfolio that are successful.

If the contingency fee arrangement proposed by the ALRC is implemented, we may see a further rise of portfolio funding in class actions.

Licensing Regime for Legal Finance Professionals

The ALRC are also looking at if, in order to operate in Australia, legal finance professionals should be required to obtain and maintain a licence. The licence being considered by the ALRC appears to be a form of the Australian Financial Services Licence, and it may require funders to:

  • Do all things necessary to ensure that their services are provided efficiently, honestly and fairly;
  • Ensure that all communications with clients, and potential clients, are clear, honest and accurate;
  • Have in place adequate arrangements for the management of conflicts of interest;
  • Have sufficient resources (including financial, technological and human resources);
  • Have adequate risk management systems;
  • Have a compliant dispute resolution system; and
  • Be audited annually.

Vannin Capital is one of the founding members of the Association of Litigation Funders (ALF) and, as such, has already voluntarily elected to be bound by a Code of Conduct which touches on most of these topics. The ALF Code of Conduct sets out the standards by which all members of the ALF must abide. Key aspects of the Code of Conduct are:

  • Capital Adequacy - Vannin Capital has agreed to maintain adequate financial resources at all times in order to meet its obligations to fund all of the disputes it has agreed to fund, and to cover aggregate funding liabilities under all of our funding agreements for a minimum of 36 months;
  • Termination and Disputes - Vannin Capital has agreed to behave reasonably and may only withdraw from funding in specific circumstances. Where there is a dispute, including about settlement or termination, a binding opinion is sought from an independent QC; and
  • Control - Vannin Capital is prevented from taking control of the litigation or settlement negotiations and from causing the litigant's lawyers to act in breach of their professional duties. Vannin Capital should be kept informed of the progress of a claim but it does not hold ultimate control over the claim.

Justice Derrington, President of the ALRC and Justice of the Federal Court, made it clear in a recent address that the Litigation Funding Inquiry will be comprehensive and swift. The ALRC, on 31 May 2018, published its Discussion Paper 85. A formal consultation and submission process now follows with the ALRC's final report expected to be handed to the Attorney-General by 21 December 2018. Vannin Capital is looking forward to assisting with the inquiry.

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